Michael Campbell: What are the implications of solving a huge debt problem by taking on more debt?

Greg Weldon: Its more than Ireland or Greece when you think that 25 out of 27 EU nations are in violation of rules on either debts or deficit relative to their GDP. We’ve been saying for a long time that for Europe to to bail out Europe is ridiculous. To think that the US is going to commit a trillion dollars to any foreign bail outs is even more ludicrous. Really the spark in the stock markets around the world was that comment from an unnamed US official that the United States promised to buoy up the International Monetary Fund, with another trillion dollars.

The European Central Bank has been in a program to buy debt, but they sterilized that money they put in the system by withdrawing it at the back end. So they are not even really playing ball to begin with to the degree that the Fed has in the US. Having said that, the European Central Bank is expanding their balance sheet again. The Bank of Japan balance sheet just hit a new interim high. The US bought a lot of bonds and unfortunately they’ve had mortgage roll ups so they haven’t yet in net expanded their balance sheet to new heights, but they’re in the process of doing it. So when you have the three major central banks in the world expanding their balance sheets, that does provide some underpinning in terms of liquidity. To think that that’s a solution to these long term problems is absolutely ludicrous.

Michael: In your view then Greg, it’s not a matter of if we have a day of reckoning, it’s just when?

Greg: There is no way out. This is the cycle that you’re caught in and you can never underestimate the ability of monetary officials around the world to get creative. This is a bubble that goes back to the US removing the dollar from the gold standard. What we’ve entered into is an absolute the day of reckoning. But it’s not here yet because we’re going to keep going through these vacillations where they pump it up and dump until they can’t do it anymore. The second you pull the rag out from under the market in terms of support either fiscally or monetarily, it’s a nightmare waiting to happen.

So they have boxed themselves into a corner where pump it up is the only way out, yet inevitably it is doomed to fail. Timing that failure is what is just so difficult and it becomes increasingly difficult as these vacillations become more and more extreme. You might liken it to an EKG where you have a nice little pattern of up and down, up and down, up and down then in the ’97, ’98 crisis that pattern became a little more wild, in 2000, 2001 more wild, and 2007, we were into the heart attack stage.

Michael: In the Gold Trading Boot Camp you wrote in 2006 you chronicled the kind of situation financially that we’re finding ourselves in right now. You wrote about taking advantage of gold as a protection against these kind of events. Where do you think gold is right now?

Greg: Gold still has significant upside. We actually became a little bit more cautious on precious metals about six weeks ago, when it looked like global interest rates had started to rise. But as we mentioned before the Bank of Japan’s balance sheet is expanding again, the ECB expanding its balance sheet and the Fed doing the same. As soon as these mortgage roll offs get out of the way the feds balance sheet should explode. So this certainly is positive for Gold.

More importantly in the bigger picture, when you take a look at gold prices in every currency in the world, it’s not a dollar move. Gold is gaining against every single currency in the world. The flip side of that is that every currency in the world depreciating relative to gold because central banks are debasing money everywhere. That’s the bottom line when talking about gold. That’s what people tend to miss, tend to overlook, is what is really at the core of this. It’s kind of veiled, it’s kind of hidden, and no matter which way it goes, whether it is a successful hyper-reflation or whether it is a downturn to debt deflation, either scenario incorporates a lower standard of living. For example if you bought a million dollars of treasury bonds five years ago, versus buying gold at $450. While you got your money back because the bond was ‘safe’ guaranteed investment, the million dollars you got back it buys one third the amount of gold it could have bought 5 years ago. That in a nutshell is the debasement of the currency at work. It is the lower standard of living at work. We’ve lived on this credit bubble for so long that he downturn is going to be very difficult to fight because we’ve become reliant on expanding credit.It’s not the right thing to do, it’s just because we’ve become so reliant on it now.

Gold is so attractive in the long term because this is a trend that is intensifying. It’s a trend that’s broadening, and the tentacles are reaching throughout the world in places that it has not reached before. You’re not protected in currencies, so for me on the longer term picture gold still looks attractive even at these prices.

Michael: Is silver outperforming gold?

Greg: Silver is absolutely outperforming gold. It has been a big performer and an upside leader for quite some time in the near term. I have a love for Silver as when I first started the business it was in the Silver pit in New York Cities World Trade Centerback in the hey day of $50 Silver.Talking about the bigger picture, Silver has a great appeal in that it’s a lower denomination metal, you can hold smaller quantities, exchange it for less value in terms of what you mightexchange Gold in potentially a real worst case scenario down the road. From that perspective I still like Silver. It does continue to outperform gold and I expect that to be sustained.

Michael: Always fascinating Greg, Greg does all the work that other analysts and institutions want to have a look at. He gets behind the numbers and obviously has a terrific understanding of what’s going on. You can subscribe to Greg Weldon’s Newsletter at weldononline.com.

Additional disclosure: Michael Campbell of Money Talks has interviewing the best in the Financial Investing/Trading business for 28 years. He is an independently wealthy man who does this for altruistic reasons. He made his fortune selling his manufacturing company to a fortune 500 firm Ralston Purina. He started his career in 1980 with Merrill Lynch as a stock broker and he followed that 10 year career by editing Equity Magazine.